VTB v Nutritek: Piercing the Corporate Veil: UK Supreme Court Preview

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The truly important and absorbing case of VTB Capital plc (Appellant) v Nutritek International Corp and others (Respondents)UKSC 2012/0167 has made it to the UK’s court of final recourse which granted permission to appeal on 26 July 2012. The case is going to be heard for three days by Lords Neuberger, Mance, Clarke, Wilson and Reed JJSC from 12 to 14 November 2012 . There are a lot of issues in this case. Notably a couple of juicy ones are (1) whether the court can pierce the corporate veil and treat a person as a party to a contract if that person uses a puppet company to enter into a contract with a third party in order to perpetrate fraud on that third party and (2) when determining whether England is clearly the appropriate forum, is there a presumption that a defendant who has committed a wrong in England ought to answer for that wrong in England. For some reason this case is not being broadcast live. Maybe it is just too high profile and controversial to show live. Too bad … because upon appeal to the UKSC, even Special Immigration Appeals Commission dealing with national cases are aired.

Facts

VTB (“V”), a London-based bank (the appellant) entered a facility agreement with a Russian company (“R”) in 2007. Under that agreement, V loaned R $225m to fund the purchase of six Russian Dairy Plants (“the dairy companies”) from the first defendant (Nutritek, “D1”: the “defendants” (at first instance) also became the “respondents” in subsequent proceedings). R subsequently defaulted on the loan. In 2010, V began claims in deceit, alternatively conspiracy to defraud, against the defendants. In May 2011, Chief Master Weingarten granted permission to serve the claims on the defendants out of the jurisdiction. In August 2011, V obtained a worldwide freezing order against Konstantin Malofeev or “D4”: see below.

V was a subsidiary of a Russian state-owned bank. It lent money under a facility agreement to R to fund R’s acquisition of Russian companies from the first defendant D1. The agreement provided for English law and jurisdiction. By clause 1.3, the facility agreement provided that “a person who is not a Party has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or enjoy the benefit of any term of this Agreement.” Moreover, under the terms of the contract, “party” was defined “a party to this Agreement.” Under clause 35.1, the contract was governed by English law and it was subject to the non-exclusive jurisdiction of the English courts. Similarly, under clause 35.3, V had the right to refer to arbitration (pursuant to the London Court of International Arbitration Rules) any dispute arising out of or connected to the agreement.

Given that R had defaulted on the loan, V alleged that it had been induced to enter into the facility agreement by fraudulent misrepresentations made by D1, for which the other defendants were alleged to be jointly liable, as to the value of the companies sold and that R was not under joint control with D1. The second defendant (Marshall Capital Holdings, “D2”) was a British Virgin Islands holding company which indirectly owned a substantial interest in D1. The fourth defendant (Konstantin Malofeev, “D4”) was an individual said to be the owner and controller of D1, D2 and R. V’s case against the defendants was founded in deceit and unlawful means conspiracy. V applied to amend to add claims in contract on the basis that the court should pierce the corporate veil of R so as to make the defendants liable as parties under the facility agreement.

It is V’s case that R was controlled by Marshall BVI (or “D2”), Marshall Capital LLP (or “D3”) and Konstantin Malofeev (or “D4”) and they deliberately misused R’s corporate structure in order to defraud V.

In October 2011, V applied to amend its particulars of claim to add a claim for breach of contract against D2, D3 and D4. V alleged the defendants had fraudulently misrepresented that R was a purchaser in separate control which was buying the dairy companies from Nutritek or “D1” under an arm’s length transaction.

After a six day hearing (read judgment), following two days pre-reading, Arnold J regretted handing down an extensive 255-paragraph judgment. But with 27 bundles of procedural documents and 14 bundles of authority what else could he do: the number and complexity of issues was absolutely overwhelming. Nonetheless, undeterred, Arnold J still tried to take everything into account but the judge refused permission to amend the particulars of claim. Please note that the court considered four principal agreements: these were the facility agreement, the share purchase agreement, the interest rate swap agreement and participation agreement and Arnold J set these out at para 42 of his judgment; in para 43, the court also set out a “a series of apparent agreements”; these are expanded upon in subsequent parts of the judgment.

Essentially, Arnold J refused V’s application to amend the particulars of claim. He also made a declaration that the court had no jurisdiction in respect of the claim against D2 and that it would not exercise jurisdiction in respect of the claims against D1 and D4. He accordingly set aside service out of the jurisdiction. The court also held that the English court lacked jurisdiction and discharged a worldwide freezing injunction.

The Court of Appeal (Lloyd, Rimer and Aikens LJJ, read judgment) dismissed V’s appeals (1) for leave to amend to plead the case in contract against Arnold J’s judgment (2) against the refusal to continue the WFO and (3) on the jurisdiction issue.

Essentially, the court overturned Antonio Gramsci Shipping Corp and others v Stepanovs [2011] EWHC 333 (Comm), which predated Arnold J’s decision, by holding that it was contrary to authority to hold that the judicial piercing of the veil of a company that an individual or other controller has used with a view to masking his own breach of contract results in the court treating the individual or other controller as himself a party to that contract.

For Lloyd LJ, para 45, in English law there was no authority to support a “remedial constructive contract” and so the courts did not have jurisdiction to impose contractual obligations under a contract to which the parties had not agreed or intended to agree.

It was only suitable to pierce the corporate veil in special circumstances where a façade concealing the true facts existed. Veil-piercing, which is a limited principle, had been “developed pragmatically” to provide a practical solution in particular factual circumstances: “The reported authorities certainly proceed on the basis that (in the usual case) the puppet company and the controlling puppeteer are to be closely identified, an identification that will or may be regarded as justifying the grant of a judicial remedy against the puppet as well as the puppeteer, if only on the basis that it will be just and convenient to do so”: para 94. Thus, veil piercing could not be raised wherever it was necessary to do so in the interests of justice and no unconnected third party was involved.

Since jurisdiction is an important feature of this case it is worthwhile remembering that in Spiliada Maritime Corporation v Cansulex Ltd[1987] AC 460, Lord Goff of Chieveley observed that (a) where a claimant seeks leave to serve proceedings on a foreign defendant out of the jurisdiction, the task of the court is to identify the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice and (b) in such a case the burden is on the claimant to persuade the court that England is clearly or distinctly the appropriate forum.

So under the Spiliada the two limbs of the doctrine of forum non conveniens are that England is the natural forum because it is clearly the more appropriate forum than any other available foreign forum or the claimant must demonstrate that even if England is not the natural forum, it is in the interest of justice that the case be tried here. Insofar as the “natural forum” is concerned, consideration should be given where (which forum?) the claim has the most real and substantial connection. This includes features such where as the parties are resident and where they conduct business. And of course, the law governing the transaction in question is also very important.

Also by way of recap, in Faiza Ben Hashem v Shayif and Another [2008] EWHC 2380 (Fam), Munby J (paras 150 – 164) appraised the authorities on veil piercing of incorporation as:

Ownership and control of a company are not of themselves sufficient to justify piercing the veil.

The court cannot pierce the veil, even when no unconnected third party is involved, merely because it is perceived that to do so is necessary in the interests of justice.

The corporate veil can only be pierced when there is some impropriety.

The company’s involvement in an impropriety will not by itself justify a piercing of its veil: the impropriety “must be linked to use of the company structure to avoid or conceal liability”.

It followed that if the court is to pierce the veil, it is necessary to show both control of the company by the wrongdoer and impropriety in the sense of a misuse of the company as a device or façade to conceal wrongdoing: his Lordship’s emphasis.

A company can be a façade for such purposes even though not incorporated with deceptive intent.

In the instant case, Lloyd LJ, para 39, set out the issues under the contract, tort and WFO heads.

Contract

As already noted V wanted to amend its particulars to include the defendants’ liability in contract by piercing the veil of incorporation of R. If that were allowed, then V might be entitled to serve the amended claim form on the defendants as of right under article 23(1) of Council Regulation 44/2001/EC on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Regulation). Moreover, if VTB cannot rely on article 23(1) and so requires permission to serve the amended proceedings out of the jurisdiction, it should have permission to do so (so far as the claim in contract is concerned) pursuant to gateway (6) of paragraph 3.1 of PD 6B of Part 6 of the Civil Procedure Rules 1998 (“CPR”).

Tort

The Private International Law (Miscellaneous Provisions) Act 1995, or PIL 1995, is applicable to claims in tort in the UK. Although PIL applies to torts committed on or after May 1996, it does not usually apply to torts after Regulation (EC) No 864/2007 – or “Rome II”, that has currency since 11 January 2009 – on the law applicable to non-contractual obligations coming into force. (Rome II is applicable to events giving rise to damage occurring after its entry into force). Under section 11 (Choice of law: general rule) of the PIL 1995 the general rule is that the applicable law is the law of the country where the tort was committed. By section 12 (Choice of applicable law: displacement of general rule), the general rule is not applicable when it is significantly more appropriate to apply another country’s law.

In relation to the “centre of gravity” of the torts, at para 163, the Court of Appeal unequivocally said:

On the material that is before us, taking all those factors into account we have concluded that the centre of gravity of these torts lies in Russia. Therefore, for present purposes, we have decided that a comparison of the significance of the section 11(2)(c) factors, assuming that they would lead to the applicable law being English, with the significance of the other factors connecting the torts with Russia, leads to the conclusion that it is substantially more appropriate for the applicable law for determining the issues concerning the torts to be that of Russia.

In relation to the tort issues it is common ground that there are three basic requirements that VTB must satisfy in order to obtain permission to serve the proceedings out of the jurisdiction – pursuant to gateway (9) – on D1, D2 and D4:

Firstly, V must show that there is a serious issue to be tried on the merits of the claims against each defendant on which it seeks to serve the proceedings out of the jurisdiction. That means that V must show that there is a substantial question of law or fact or both, with a real, as opposed to a fanciful prospect of success.

Secondly, V must establish that there is a good arguable case that the claim against each particular foreign defendant falls within the class of case relied on for permission to serve out of the jurisdiction.

Thirdly, it is for V to establish that the English court is clearly or distinctly the appropriate forum in which to try the issues that arise between the parties.

The tort issues are quite complex and the parties’ positions in respect of these are set out at para 39 of Lloyd LJ’s judgment.

Interestingly, there is also a subsidiary issue embedded in this case which is relevant to both the contract and the tort claims. V’s only claim against D1 is in tort, but if it can establish jurisdiction against one or more other defendants, whether in tort or in contract, it will be able to rely on gateway (3) in paragraph 3.1 of the Practice Direction (“necessary or proper party”) to serve on D1, as a “proper” (though not a “necessary”) party. Thus, according to the Court of Appeal, D1’s position depended on the view taken by the court on the merits of the tort claim generally (called the “no loss” point in the judgment) and on whether the claim can proceed in the English courts against another defendant. If it cannot proceed against another defendant, then jurisdiction as regards D1 would depend on gateway (9) in paragraph 3.1 of the Practice Direction, on the merits of the tort claim. In the Court of Appeal, this aspect of the case did not require or receive any separate submissions.

The World Freezing Order Issues

If V can maintain the permission to serve out as originally granted, as regards Mr Malofeev or D4, or can establish that it can or should be allowed to serve out on the basis of its contract claim against him (or both), should it continue to have the benefit of the WFO against him?

For Lloyd LJ the two important points were whether:

V has shown a sufficiently well arguable case for liability against D4, and whether it has established that there is a real risk that, unless restrained by injunction, he will dissipate his assets, otherwise than through ordinary living or business expenditure.

The WFO as originally obtained ought to be discharged because of material non-disclosure on the part of V when applying for it to Roth J.

While the English courts have power to grant freezing injunctions in respect of overseas assets, the courts will only exercise their jurisdiction where there is evidence of a real risk that any judgment may not be satisfied. Moreover, in the event that the claim involves an allegation of criminal behaviour by the defendant, under Abbey National plc v Daily Meals Ltd and others [2006] All ER (D) the risk of dissipation of assets may be more readily inferred. However under Irish Response Ltd v Direct Beauty Products Ltd and another [2011] EWHC 37 (QB), evidence of the respondent’s dishonesty alone is not enough to satisfy the court that there is a real risk of dissipation.

On the whole, in the instant case, the Court of Appeal held that:

The contract claim that V wished to advance was not founded on a cause of action known to English law.

Veil piercing in was appropriate only where special circumstances existed indicating that it was a mere façade concealing the true facts.

However, following the piercing of the veil, the court could not treat those in control of the company as themselves parties to its contracts.

Arnold J was right to refuse permission to amend.

There was a good arguable case that V had suffered a loss, even though it had been put in funds by its parent to make the loan, and as a result had sustained damage within the jurisdiction within the meaning of CPR PD 6B, para 3.1(9)(a): para 121.

Contrary to the Arnold J’s view, there was a triable issue that D2 was, through the agency of D4, a party to the torts against V: para 127.

V had a good arguable case that its loss was sustained in England, but other elements of the torts occurred elsewhere. In the circumstances there was no presumption that England was the natural or appropriate forum: para 144.

Arnold J had erred in his approach by failing to decide what were the most significant elements of the torts of deceit and conspiracy on the facts.

The arguments on the significance of the events constituting the torts for the purposes of the PIL 1995, within the meaning of section 11(2)(c), were evenly balanced.

Making the comparison required by section 12 of the significance of the section 11(2)(c) factors, assuming that they would lead to the applicable law being English, with the significance of the other factors connecting the torts with Russia, led to the conclusion that it was substantially more appropriate for the applicable law for determining the issues concerning the torts to be that of Russia: para 163.

Applying The Spiliada, in the circumstances V had failed to demonstrate that England was clearly or distinctly the appropriate forum.

Arnold J was, therefore, right to set aside permission to serve the proceedings out of the jurisdiction: paras 164-168.

Because the court lacked jurisdiction, there was no question of continuing the freezing injunction against D4. But it would have been right to take into account, when considering the risk of dissipation, a finding of a good arguable case that D4 had been engaged in a major fraud, and that he operated a complex web of companies in a number of jurisdictions, which enabled him to commit the fraud and would make it difficult for any judgment to be enforced; para 178.

As stated above, this is a hugely important case studded with a range of complex issues in company, civil and international law. Too bad it was not show live. Usually, even national security cases involving the Special Immigration Appeals Commission are.

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